New Louisiana Law Enables Parents to START Saving for K-12 Tuition

A new state education savings account program, START K12, will allow parents, grandparents, and other loved ones of public and private school students to set up a 529 plan to pay for elementary and high school education.

Act 687 and House Bill 650, which won approval in the 2018 Louisiana Legislature Regular Session and was introduced by Reps. Franklin Foil, Steve Carter, Rick Edmonds, and Chris Hazel, have authorized the creation of the “Louisiana Student Tuition Assistance and Revenue Trust Kindergarten Through Grade Twelve (START K12) Program.” The START K12 Program is intended to implement the expansion of state 529 programs to cover elementary and secondary education, in addition to the benefits previously allowed for postsecondary institutions, as authorized by the Federal Tax Cuts and Jobs Act of 2017. In the past, 529 plans could only be used for postsecondary (college) expenses, but federal law recently expanded 529 plans to cover private school elementary and high school tuition, and Louisiana has now followed suit with the enactment of this new law.

The START K12 Program is a new program to allow the establishment of an education savings account (an “ESA”) for specified expenses associated with enrolling a student in grades kindergarten through 12th grade. The START K12 Program shares similarities with Louisiana’s existing START Program that establishes education savings accounts for expenses associated with enrolling in college or other postsecondary education institutions. Both the START Program and the START K12 Program are implemented under and consistent with federal guidelines applicable to state 529, education savings programs. As with the START Program, the Louisiana Tuition Trust Authority oversees the administration and operation of the START K12 Program.

There are tax and financial benefits associated with an ESA established under the START or START K12 Programs, but these benefits currently differ depending on whether you are investing in the START Program as opposed to the START K12 Program. A brief overview of the primary benefits, and key differences between the START and START K12 Programs, includes:

Amounts contributed to a START (college) ESA are eligible for an “earnings enhancement,” which is a percentage match by the State of Louisiana on amounts contributed to these START (college) ESAs. The amount of the earnings enhancement available depends on the ESA owner’s income, and ranges from 14% for owners who have adjusted gross income (“AGI”) below $30,000 to 2% for owners who have AGI in excess of $100,000, and also the ESA owner’s relationship to the beneficiary. In typical scenarios, ESA account owners who are family members of the account beneficiary are eligible for the earnings enhancement. Earnings enhancements are earned on an annual basis, and posted into the ESA on December 31 each year. Earnings enhancements are not available for amounts contributed to START K12 ESAs under the current law.

Income earned on amounts invested in both START and START K12 ESAs is not subject to federal or state income tax as long as the income is distributed to pay for “qualified education expenses” for the beneficiary of the ESA.

Amounts deposited into a START (college) ESA can be excluded from Louisiana taxable income, up to $2,400.00 for individual taxpayer ESA owners, and up to $4,800.00 for married taxpayer ESA owners filing jointly, per beneficiary. This same income exclusion is not presently available for contributions to START K12 ESAs.

While the START Program and the START K12 Program offer a variety of saving funds, the amounts contributed to the Louisiana Principal Protection Fund (Fixed Earnings), if this fund is selected by the ESA owner, are guaranteed by the State of Louisiana.

Amounts held within START and START K12 ESAs can be protected from claims of creditors of ESA account owners, contributors and participants.

Amounts contributed and earned in an ESA established under the START K12 Program can be used to pay for “qualified education expenses,” which include tuition owed in connection with enrollment or attendance at a public or approved nonpublic elementary or secondary school in Louisiana that includes any grades kindergarten through 12th grade. In the future, owners of START K12 ESAs can make annual withdrawals of up to $10,000 to pay qualified education expenses for a beneficiary of an ESA.

Software development will be required to implement the new START K12 Program, so further guidance and specific rules will be forthcoming on this new law. Act 687 contains a transition provision for calendar year 2018 that will allow START (college) ESA owners who had an account as of December 31, 2017, to make a one-time withdrawal of up to $10,000 from their START ESA during 2018 to pay tuition expenses related to kindergarten through 12th grade for the beneficiary of the existing START ESA. Disbursements may not be more than what was in the account as of December 31, 2017, and they may not exceed the current account balance. If you are a START ESA owner and wish to request a disbursement for kindergarten through 12th grade expenses for the 2018 calendar year, and meet the criteria in the above paragraph, please click here for the disbursement form.

The state plans to have the START K12 Program fully operational for 2019, and in 2019 and thereafter, transfers from START (college) ESAs to START K12 Program ESAs will not be allowed.

About Rebecca Hinton: Practicing law since 2006, Taylor Porter Special Counsel Rebecca Hinton represents individuals and businesses in the areas of federal, state and local taxation; tax controversies; estate planning; numerous business matters; successions; and trusts.

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